issue 7

| 2 010

Complimentary article reprint

Good medicine
or a bitter pill?
Implications of health care reform
for businesses in America
By Robert W. Clarke > Paul H. Keckley
and Steven Kraus
> illustration by JON KRAUSE

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G o o d medicine
o r a b i tter pill?
Implications of health care reform for businesses in America

By Robert W. Clarke > Paul H. Keckley and Steven Kraus

> illustration by JON KRAUSE

A
merica seemed to collectively exhale on
March 30, 2010 when President Obama
signed final revisions to the Patient Protec-
tion and Affordable Care Act (PPACA) into law.
Whether hopeful, angry, excited or fearful about
the act’s potential effects on the nation’s health
care system, many citizens seemed grateful for a
breather after 14 months of arduous congressional
debate and emotional public dialog.

Other issues and events may have since replaced

health care reform in daily headlines. But the im-
pact of, and debate about, this landmark legisla-
tion continues to reverberate in the media and
boardrooms, workplaces, kitchen tables and gov-
ernment corridors.

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The full implications of the PPACA, and other legislative and regulatory initia-
tives affecting health care, will unfold over the next decade and beyond. But the
journey to a new health care system has begun, with enormous implications for
businesses in America. In fact, reform affects the majority of American businesses
because of their role in funding and providing health care for employees and em-
ployees’ families.
For one group of businesses, reform presents a double challenge. Health sci-
ences companies – health insurers, health care providers, and life science compa-
nies – will need to adapt to both the changes affecting them as employers and the
transformation of the health care delivery system in which they play key roles.
While many of the most dramatic changes will occur in 2014, important mile-
stones this year will demand the urgent attention of business leaders. This article
explores our view of the current and future path of health care reform and exam-
ines the resulting effects, both certain and possible, across the business spectrum
– from employers who may now bear an even greater burden of responsibility for
providing health benefits to employees, to the health industry stakeholders that are
front-line providers of care. And it offers considerations for business executives in
their efforts to address their organizations’ transition to the new health care order.

Health care reform – not a one-act play

G enerally speaking, health care reform has three goals: expanding health cov-
erage to the uninsured, improving health care quality and access, and stem-
ming the growth in health care costs.
With the passage of the PPACA, the first goal should be attained in 2014, with
approximately 32 million uninsured Americans becoming covered.1 The other
two goals are more aspirational, to be influenced by many factors. At this stage,
whether health care reform will contain or lower costs is conjecture, dependent
on successful demonstration projects and pilot programs in the bill, and efficient
management of services for an aging population and the newly insured.
The PPACA is the centerpiece of health care reform today, but it is not the
only element:

• Provisions in the American Recovery and Reinvestment Act (ARRA)

of 2009 provided additional funding for Medicaid, expansion of health
benefits for the unemployed, and development of health care information
technology.2

• New clinical coding standards described in the International Statisti-

cal Classification of Diseases and Related Health Problems 10th Revision
(ICD-10) are scheduled for U.S. implementation in 2013.3
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• The Obama Administration’s proposed federal government budget for fiscal

year 2011 contains reform-related provisions, including changes in Medi-
care and Medicaid reimbursement and funding for comparative effective-
ness research, public health programs, targeted programs for states to reign
in health costs, programs for health
centers to expand primary
and preventative care,
and programs for As federal and state
expanding access gover nments begin
to care in medi- implementation of
cally under- health care reforms,
served areas. businesses need to
• Efforts are start addressing an
also underway array of new issues
at the state and requirements –
level, such as and the sooner the
expanding in- better.
surance coverage
through public and
private insurance pro-
grams, health savings accounts,
premium support, and support for develop-
ment of electronic data exchanges.4

Federal rulemaking will clarify a number of provisions in the PPACA. The

words “The secretary shall” preface over 1,000 provisions, which the U.S. Depart-
ment of Health and Human Services (HHS), led by Secretary Kathleen Sebelius,
must address. Many different federal agencies will issue PPACA-related rules, in-
cluding HHS, the U.S. Food and Drug Administration, the Center for Medicare
and Medicaid Services, the National Institutes of Health, and the Centers for Dis-
ease Control.
Another uncertainty is how states will fulfill their roles in implementing health
care reform. Much of the heavy lifting falls to the states, including establishment
of health insurance exchanges intended to provide a resource “where individuals
and small businesses can compare and purchase health insurance online at competi-
tive prices.”5 While HHS will provide funding, guidance and information systems
to help states comply with reform mandates, the states are likely to respond in
different ways.

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As federal and state governments begin implementation of health care reforms,

businesses need to start addressing an array of new issues and requirements – and
the sooner the better. Mandated changes in employee insurance coverage go into
effect in fall 2010.6

Implications for employers: New coverage and reporting

requirements

A recurring debate during the health care reform deliberations centered on

whether the United States would or should adopt a government-operated,
national “style” of health care system similar to Canada, Europe and many other
countries to replace employer-sponsored insurance. With passage of the PPACA,
the United States is arguably moving in the opposite direction. If anything, the
act solidifies the role of employers in providing health benefits to their employees.
Employers seem generally amenable to this, provided there is a competitive
playing field for companies throughout their business sector and that all are held
to the same requirements. Major concerns remain among employers – will enough
younger, healthier individuals enter the insurance market to offset retiree Medicare
costs? Will the government impose additional restrictions and costs of compliance
on employer-sponsored plans? And long term, how will Employee Retirement In-
come Security Act (ERISA)-exempt plans be impacted?
The “new normal” for employer-sponsored insurance benefits is likely
to include:

• Substantial consolidation in the hospital and health insurance industries as

stronger players absorb weaker players, with a resulting strengthening of
their bargaining position for prices for their services.

• Substantial cost increases by hospitals and other providers as underlying

medical costs increase from an aging population, new technologies are in-
troduced, and demand for services increase, all resulting in greater price
pressure on insurers and employers.

• Substantial pressures from employees and dependents for expensive tech-

nologies and treatments that might work for some but not all.

More than 20 areas in the PPACA are likely to impact employers, taking effect
in coming years (see “Health Care Reform – Employer Timeline” next page.) Some
of these provisions with more immediate deadlines have come into sharp focus.
All employers, especially larger companies, should analyze these provisions as they
begin to redefine their employee health benefit strategies in light of the new law.

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Health Care Reform – Employer Timeline

Effective for plan years beginning six months after enactment
(1/1/2011 for calendar year plans)
• Prohibit lifetime limits on the dollar value of coverage. Grandfathering does not apply.
• Coverage must be available to dependent children (married or unmarried; student or not)
to age 26. Grandfathering does not apply.
• Prohibit pre-existing condition limitations for children. Grandfathering does not apply.
• Annual limits on the dollar value of coverage must be reasonable (as defined by regulation
to come). Grandfathering does not apply.
• Subject to regulations, require most employers to automatically enroll new full-time em-
ployees into a health plan option. Employees may choose to opt out.
• For non-grandfathered plans, preventive health services must be provided without cost
sharing (‘A’ or ‘B’ rated by the U.S. Preventive Services Task Force).7

Effective 2011
• Over-the-counter medications not reimbursable through a Health Reimbursement .
Account (HRA) or Health Flexible Spending Account (FSA); prescribed medicines, drugs
and insulin still qualify.
• Non-health HSA distributions taxed at 20 percent.
• Employers required to disclose on Form W-2 the value of health benefits.

Effective 2012
• Employers must distribute a uniform summary of benefits and coverage explanation prior
to enrollment or reenrollment.

Effective 2013
• Medicare Part A tax increased to 2.35 percent for earnings over $200,000 (individual
return) and $250,000 (joint return).
• Employer tax deduction for Medicare Part D retiree drug subsidy eliminated.
• Health care FSA contribution limited to $2,500 annually (indexed).
• Employers required to notify employees of the establishment of health insurance
exchanges in 2014.

Effective 2014
• Individual mandate applies (may increase enrollment in employer plans).
• Exchanges open.
• Annual limits on the dollar value of coverage prohibited.
• Waiting periods cannot exceed 90 days.
• Pre-existing condition limitations for adults prohibited.
• “Essential benefit provisions” (determined annually by the Secretary of HHS) apply to new
plans; regulations will determine when plan changes are significant enough to trigger
“new” plan provisions.
• Employer mandate and potential penalties begin.
• Employers may offer rewards to employees who participate in wellness programs, limited
to 30 percent of the cost of coverage.
• Employers required to furnish an information return to employees and to the govern-
ment identifying coverage periods, the portion of premium paid by employer and other
information.

Effective 2018
• 40 percent tax on high-value plans (over $10,000 for individuals and $27,500 for families).

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Key considerations include:

How and to what extent “grandfather” provisions of the PPACA apply

During the health care debate, President Obama repeatedly assured Ameri-
cans that if they like their health care coverage they won’t have to change it. The
PPACA does in fact include a grandfather clause for employer plans in existence as
of the date of the act’s enactment.
With the exception of some insurance reforms—such as barring coverage
denials for pre-existing conditions and shortening allowable waiting periods be-
fore extending coverage—employer plans in existence on the date of enactment
will not have to be changed to comply with other parts of the PPACA. Regula-
tory guidance on how much an existing plan can change and not lose grandfather
status is expected later in 2010. This will be a critical issue for businesses as they
weigh the effects and costs of other provisions, because loss of grandfather status
could force employers to broaden their benefits plans and potentially incur higher
health insurance premiums, both of which might result in higher overall health
benefits costs.

Health plan changes resulting from insurance reforms and creation of the
“essential health benefit package”
If a company has a health plan that loses grandfather status, or it is creating a
plan for the first time, it will likely be required to establish an “Essential Health
Benefit Package.” Effective in 2014, this is a groundbreaking provision, as the fed-
eral government has never previously mandated that a set of services be included
in employer plans.
Which services will be required in an Essential Health Benefit Package is yet
to be determined, and a comprehensive set of services will be established annually
by the HHS secretary. However, if the experience in individual states is a guide,
additional services not covered historically by employers, such as acupuncture and
homeopathy, could potentially be included in the package.

Workforce planning implications of new eligibility and coverage provisions

The PPACA establishes minimum standards for insurance eligibility and cov-
erage for the first time. Effective when regulations are issued, new full-time em-
ployees working at least an average of 30 hours per week during a month must be
enrolled automatically in an employer-sponsored health plan. Employees can opt
out and instead obtain coverage from their state’s insurance exchange. In addi-
tion, while the PPACA does not explicitly require that an employer offer its full-
time employees acceptable health insurance, employers with at least 50 full-time
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equivalents will generally face penalties, beginning in 2014, if one or more of their
full-time employees obtains a premium credit through an exchange.8 While not a
mandate, these provisions may have a similar effect.
The PPACA standards will significantly affect industries that employ part-
time, temporary, seasonal and float-pool workers extensively. In addition to the
30-hour provision, employers will only be allowed to impose a maximum 90-day
waiting period before full-time employees
become eligible for benefits. This
maximum is significantly less
than the competitive norm E mployers that don’t
in certain industry sec-
provide coverage,
tors. Also, employers
provide coverage
that previously of-
that is too expen -
fered coverage only
sive, or have em -
to employees will
ployees who opt
now need to offer
coverage to em-
out of coverage and
ployees’ dependents. buy through the
These changes exchanges face
could dramatically af- financial penalties.
fect industries such as
retail, hospitality and health
care. Many retailers, for example,
require that employees work 35 to 40
hours per week before being considered full time and eligible, as well as going
through a waiting period of 180 days or longer before receiving health coverage.
Such employers should consider assessing their workforce profile in light of the
new eligibility and coverage realities of the act.

Compliance and reporting requirements

The PPACA imposes an “individual mandate” requiring everyone in America
to have health care coverage obtained in one of three ways: from an employer, from
a governmental plan like Medicare and Medicaid, or purchased from one of the
state insurance exchanges to be established in 2014. Employers that don’t provide
coverage, provide coverage that is too expensive, or have employees who opt out of
coverage and buy through the exchanges face financial penalties.
Under the act, children can remain on their parents’ employer health insurance
plan until age 26. Also, health plans cannot deny coverage to children under the
age of 20 because of a pre-existing condition.
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Im p l i c at i o n s f o r he a lt h sciences
co m pa n i e s : As s e s s i ng t h e impact on
th e f r o n t l i n e s

As purveyors of health-related services and products, health plans, health care pro-
viders and life sciences companies will experience health care reform differently:

Health plan impacts

This sector is probably affected most dramatically and must grapple with major issues imme-
diately. Approximately a dozen provisions in the PPACA require action by insurance companies
within six months after passage of the act. Changes to be made effective for plan years begin-
ning September 23, 2010 include removing lifetime limits from insurance policies, expanding
coverage to dependents up to age 26, and covering preventive benefits without cost sharing.
Another noteworthy change for health plans involves administrative standardization, which
will require insurers to work with hospitals toward simplifying basic transactions. Together with
medical benefit expense floors and new reporting, standardization compels significant invest-
ments in automation of core administration activities.
Insurers will need to act fastest, with only limited help from near-term, clarifying regula-
tions. They need to understand the act’s effects – not only the list of immediate to-dos but also
its broader, longer-term implications. How will the provisions impact their book of business,
both in terms of membership and finances? Who will their customers really be in the future?
What are the opportunities and risks going forward?

Health care provider impacts

While insurers face hard and fast change, health care providers are afforded a more gradual im-
mersion. Changes will happen more on a year-over-year basis, with a number of trial-and-error
provisions playing out.
Among immediate priorities facing providers is dealing with significant near-term impacts
related to Medicare, including Medicare rate adjustments and establishment of pilot projects to
test new payment methodologies. In addition, linkage of Medicare hospital payments to out-
comes will elevate the importance of capturing sound data that substantiates treatment quality.
Expanding coverage rolls may contribute to hospital volumes and revenues. However, cuts in
Medicare payment levels, reduced government funding of indigent care, and increased com-
mercial plan price pressure will lower per-patient revenues, driving smaller and underperforming
providers to consider finding partners. Delivery system reforms, such as bundled payments in
which hospitals and the attending physicians receive a set dollar amount from the government
for the array of services provided a patient before, during and after hospitalization, will require
stronger and more diverse relationships between hospitals and physicians.

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Provider organizations should assess whether they have optimal relationships with other
providers and are creatively managing the health of the populations they serve. Considerations
include types of care to offer, where and when to provide it, and effectiveness of IT strategies
and preparedness for ICD-10. In addition, nearly $300 million in new funding for enforcement
and program integrity activities provided by the PPACA and the ARRA will compel organizations
to assess their ability to prevent, detect and correct potential compliance issues (see “Address-
ing fraud, waste and abuse” on page 137).

Life sciences company impacts

Health care reform’s impact on life sciences companies has received less public attention to date
than on insurers and providers. However, changes for pharmaceutical companies and medical
device makers are significant.
Life sciences companies will see both positive and negative margin impacts. Drug usage
should increase with the increased number of insured Americans, increased Medicaid drug re-
bates, and closing of Medicare Part D’s “donut hole” in prescription drug coverage for seniors.
However, a new excise tax will lower margins on some medical devices, and growing use of
generic drugs will continue challenging pharmaceutical companies to generate return on capital
investments.
The expanded use of comparative effectiveness studies may significantly change how life
sciences companies conduct research and development and help guide investment decisions.
Life sciences companies will also need to decide which markets are most promising. For ex-
ample, should they focus on a changing U.S. market or shift attention to other countries?

Suggestions for health care-related companies

Health plans, providers and life sciences companies should consider a three-pronged response
to health care reform:
• Develop rapid responses to the most time-sensitive statutory and business implications.
Though major elements of the bill are effective in 2014, no health care organization can
afford to delay preparedness.

• Understand the act’s longer-term strategic implications. Pay special attention to how the
alignment of cost reductions with improved outcomes and safety could require innovative
models of collaboration between payers, providers and life sciences organizations.

• Begin a deliberate process to assess and diagnose organizational strengths and weak-
nesses resulting from real and potential long-term reform.

We believe taking a structured, disciplined approach to reform requirements, necessary re-
sponses and likely organizational impacts can help companies address these three priorities
more effectively.

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Reporting requirements in the PPACA require changes in benefit administra-

tion systems. Employers will be required to submit a filing to the Internal Revenue
Service certifying whether full-time employees have coverage, whether they have
single or family coverage, how much it costs, and the design of the health care
plan. Employers also must calculate on a standardized basis the value of health
care benefits they provide to individual employees. They will be required to com-
municate the value of those benefits through a line item on each employee’s W-2.

Steps employers can take now

As noted, most provisions of the PPACA don’t go into effect until 2014. How-
ever, with insurance reforms effective for plan years starting in September 2010
and an urgent need to inform employees of upcoming changes, employers should
take steps now to comply.
They should proceed cautiously, though, especially considering the grandfather
provisions. A misstep could mean losing grandfather status and becoming subject
to additional requirements. For example, employers that completely revise their
employee health care offerings in 2011 or later will lose protections that grandfa-
ther status may bring. And, pending regulatory guidance, material modifications
to a plan’s value or cost to employees may also trigger unintended consequences.
Hopefully, material modification guidance will be forthcoming during 2010.
Employers should consider a three-phase approach in addressing health care
reform: First, consider adjusting plan designs to meet the immediate requirements
of the act, while maintaining grandfather status. The goal is to make needed de-
sign and contribution changes without unintended consequences created by loss of
grandfather status.
Second, analyze what plan changes will be needed for 2014 when health ex-
changes and individual coverage mandates go into effect. It will be critical by then
to understand what actions employees are likely to take in terms of staying in or
opting out of employer-provided coverage. Think of how employees will react to
the individual mandate – will they be more or less likely to opt for employer cov-
erage? Also compare coverage costs through an exchange to employer plan costs.
Finally, take a strategic view of health care reform that seeks to balance the
PPACA’s requirements, health care costs and the business’s commitment to pro-
viding employee coverage. This strategic analysis needs to be performed in the
context of a potentially changed competitive landscape. First, to what degree does
health care reform modify how employers within an industry or sector deal with
their rewards responsibilities. Second, will health care reform require rethinking
workforce composition within selected sectors?

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Ad d r e s s i ng f r a ud, waste and abuse

Fraud, waste and abuse are staggering problems in the health care industry, ac-
counting for perhaps hundreds of billions of dollars in losses annually.9 According
to the Internal Revenue Service, estimates of the amount of fraud range from three
to 10 percent of national health care expenditures.10
Government efforts to address the situation are intensifying. An additional $350 million, 10-
year investment in fraud surveillance was added in the final revisions to the PPACA.11
The ARRA includes funding to strengthen antifraud oversight and investigations through sev-
eral avenues. Concurrent with passage of the ARRA, the Fraud Enforcement and Recovery Act of
2009 (FERA) was enacted, extending federal fraud laws that previously only addressed govern-
ment procurement and expanding the scope of the False Claims Act (FCA), which imposes liability
on businesses for making false statements or claims for government reimbursement.12
Provisions in the PPACA addressing fraud, waste and abuse include increased penalties for
submitting false claims, enhanced provider screening and oversight, Medicare and Medicaid
requirements to establish compliance programs, and use of tax data to identify fraudulent
providers.
One area of enforcement focus could be the fraud potential resulting from the addition of
32 million people to insurance rolls. Law enforcement officials are also expected to pay close at-
tention to hot fraud markets, such as Florida,13 as well as the nature and evolution of physician-
hospital relationships as concepts such as bundled payments gain traction.
Businesses should consider taking several steps in an effort to reduce their exposure and liability
related to fraud, waste and abuse, including:

• Take a close look at new fraud-prevention measures included in the PPACA, ARRA and
FERA. Understand specific areas the government is targeting, why such areas are being
targeted, and new requirements the provisions mandate.
• Anticipate compliance requirements relating to employee health benefits and potential
government enforcement actions.
• Establish effective compliance programs and internal controls, beginning with a strong
tone of compliance at the top that is actualized through resource commitment.
• Conduct a thorough risk assessment to map exposure in the context of applicable laws
and regulations and identify gaps that might expose the company to enforcement
activities.
• Expand the scope of existing fraud prevention programs and controls to include new
health care-related risks. Assess and refine program components, including comprehen-
sive personnel training; communication protocols; channels for employees to safely report
violations, such as whistleblower hotlines; periodic reviews and audits; and penalties for
noncompliance.
• Consider additional investment in technology to analyze transactions and detect anomalies.

A prompt and appropriate response is needed when a problem or violation is detected. Ef-
fective preparation includes identifying investigative and response resources before a crisis and
creating and documenting fraud and abuse protocols.

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A time for decisive and informed leadership

H ealth care reform has monumental implications for businesses in America.

Changes will occur over time, and specifics of many of those changes are
largely unknown today.
The many uncertainties surrounding health care reform should motivate boards
of directors and senior executives to engage as never before in understanding the
health care landscape and taking decisive action to shape their companies’ strate-
gies going forward. Simply put, corporate leaders can no longer place total respon-
sibility for health care on their human resources departments. Instead, they should
address it as diligently as any other aspect of the business, applying similar levels
of rigor to planning, risk management, compliance and measurement associated
with their organization’s health benefits.
Also, a heightened commitment doesn’t end at the gates of the corporate cam-
pus. Businesses now have a bigger ownership stake in health care than ever. We
believe they can help shape the future of health care reform by:

• Developing effective practices in benefits design and sharing them with

other employers.

• Working collaboratively with other businesses in their community to shape

the local health care delivery system, holding providers and each other ac-
countable for health care quality, safety and cost containment.

• Taking an active part in shaping national and state health care policy
through involvement with trade associations.

Finally, health care reform is likely to be a catalyst for innovations in health

care services and delivery. What has historically been an insular and rigid system
is now even riper for innovation. New players and new service delivery models are
expected to emerge to help employers overcome traditional barriers to cost control,
efficiency and improving workforce health and quality of life.
By acting both methodically and quickly to comply with near-term reform
requirements, while simultaneously laying the groundwork for future decisions,
executives can better prepare their organizations for the continuing evolution of
the nation’s new health care order.

Robert W. Clarke is a partner with Deloitte Financial Advisory Services LLP (Deloitte FAS), and is the
Deloitte FAS National Health Sciences Leader.
Paul H. Keckley is a director with Deloitte Consulting LLP, and is the Executive Director of the Deloitte
Center for Health Solutions.
Steven Kraus is a principal with Deloitte Consulting LLP.

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The authors would like to acknowledge the contributions of Robert Davis, senior manager with
Deloitte Consulting LLP; Pat Nigro, director with Deloitte Financial Advisory Services LLP; and
Frank Stevens, principal with Deloitte Financial Advisory Services LLP.

Endnotes
1. http://www.cbo.gov/ftpdocs/113xx/doc11379/Manager%27sAmendmenttoReconciliationProposal.pdf [page 9]
2. http://www.whitehouse.gov/recovery/anniversary/chapter1
3. U.S. implementation of ICD-10 is scheduled October 1, 2013 [http://www.ahima.org/icd10/icd-10-faqs-all.html#1]
4. http://www.healthreform.gov/
5. http://dpc.senate.gov/healthreformbill/healthbill73.pdf
6. “Some of the changes go into effect for the first [insurance] plan year that begins on or after six months after enactment
(September 23, 2010), so for calendar year plans, January 1, 2011.” http://www.dol.gov/ebsa/faqs/faq-PPACA.html
7. Ron Barlow, The Implications of Health Reform for Plan Sponsors, Deloitte Consulting LLP presentation.
8. http://www.ncsl.org/documents/health/EmployerPenalties.pdf
9. http://www.npr.org/templates/story/story.php?storyId=111967435
10. http://www.irs.gov/compliance/enforcement/article/0,,id=117524,00.html
11. http://www.deloitte.com/view/en_US/us/Insights/centers/center-for-health-solutions/health-care-reform/health-care-
reform-memo/6a8e7661b62f7210VgnVCM100000ba42f00aRCRD.htm
12. http://www.deloitte.com/view/en_US/us/Insights/Browse-by-Content-Type/deloitte-review/article/0c801dfbe0426210Vg
nVCM100000ba42f00aRCRD.htm
13. http://www.cbsnews.com/stories/2009/10/23/60minutes/main5414390.shtml

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